George Selgin has a much-discussed post over at Alt-M. I agree with most of it. However, I am puzzled by the following statement:

Austrian accounts of the money-creation process often exaggerate the ability of fractional reserve banks to create money “out of thin air,” even while sticking to a fixed reserve ratio, by looking at only one part of the bank money creation process.

[…]

Actually, it isn’t, for the simple reason that, more often than not, a deposit made at one bank involves a corresponding withdrawal of funds from another bank, as when the deposited sum takes the form of a check.

David Glasner has posted his paper on “Hayek and equilibrium concepts” on SSRN. An earlier version of this fascinating paper was presented at the History of Economics Society in Toronto in 2017 and the NYU Colloquium.

A teaser (taken from the abstract):

The now dominant Lucas rational-expectations approach misconceives intertemporal equilibrium and ignores the fundamental Hayekian insights about the meaning of intertemporal equilibrium.

Today is Mario J. Rizzo’s 70th birthday. There are very few economists who are as important to the development of contemporary Austrian economics as Mario.

To honor his birthday, I have received numerous messages and posts for ThinkMarkets that I will publish one after another. These posts portray Mario as a great contributor to the Austrian revival, an extraordinarily open-minded scholar and a great friend. And as is obvious by me writing this, Mario has influenced people all over the world and helped connect the international Austrian/Hayekian community with that in the U.S.

Intellectual Takeout’s Luis Pablo has published a nice piece on Estonia’s astonishing development. You can find it here. He attributes this development to Estonia’s “market-oriented reforms” during the 1990s. Importantly, Estonia has sticked with the “market-oriented” approach. I suggest that this persistence might help explain why the country has fared better than most other countries following liberalization.

– Call for Papers –

Workshop on the Future of the EMU

Leipzig, Germany

May 30, 2018

The Institute for Economic Policy at Leipzig University invites submissions for the international workshop on the Future of the European Monetary Union. The workshop will take place at Leipzig University on May 30, 2018. The papers should be policy-oriented, building a solid basis for a profound discussion of the future of the European Monetary Union. The best papers can be published after a peer-review process in a special issue of Economists’ Voice. Participation in the workshop is free, travel and accommodation costs of selected presenters will be reimbursed.

The financial crisis of 2007 eroded the public confidence in financial markets. Many people have come to believe that only the government can guarantee the stability of financial markets. Responding to increased public demand, politicians from across the political spectrum support additional “macroprudential regulation”. However, little is known about the consequences of the newly proposed regulatory efforts. When politicians fear unforeseen consequences of regulation, they might turn to Placebo-regulation, which is some regulation that merely provides a warm glow for the general public. Given the widespread belief in the need for government regulation, we suggest that such Placebo-regulation may be a good option. Market distortions are avoided. But confidence in financial markets might be restored.

High-speed broadband networks are key to the growth of digital markets as well as most modern forms of communication, and have been subject to far-reaching regulation in many countries. In this piece, we’ll review the rationale behind a cornerstone of the prevailing regulatory paradigm: forced access to incumbent operators’ network infrastructure by alternative operators on regulated terms, so-called “unbundling”.

Stefan Kolev and I run a new colloquium at Leipzig University. This “Colloquium on the Foundations of the Market Order” provides an opportunity for academics interested in the principles of the market economy and a free society to meet and discuss research. Several participants of the colloquium contribute to this blog.

Since the financial crisis, trust in the European Central Bank (ECB) has declined substantially among Europeans. We argue that the decline in trust is worrisome and can be both a cause and a consequence of the ECB’s policy failure.

The Federal Reserve’s (Fed) and European Central Bank’s (ECB) policy responses to the recent financial disasters offer two tales of unintended consequences. Our previous post outlined undesired effects of the Fed’s policies. In this post, we suggest that the ECB’s stabilization policy did not only fail to achieve its goals. Monetary policy has also hampered the structural adjustment of the European economy and prolonged the crisis.

The pre-crisis Jackson Hole Consensus view on how to take asset market developments into account in monetary policy can be summarized as follows: Because it is hard to spot bubbles in asset markets with certainty ex-ante, central bankers should not lean against the wind when there seems to be a boom in financial markets (as long as the inflation rate does not pick up). However, as a rapid fall in asset prices can pull the real economy into the maelstrom of crisis, monetary policy should react decisively when a bubble bursts and “clean up the mess” to prevent spillovers to the real economy.

Because there is empirical evidence that countries with greater credit and asset market booms in the 2000s experienced more severe financial crises in 2007-9, the pre-crisis consensus view has lost popularity. Policymakers and academics have started to think of ways to curb financial booms and lower the probability of crisis using macroprudential regulation or leaning-against-the-wind monetary policy. Continue reading →

Call for Research Proposals

IREF is a free-market oriented think tank based in France. It promotes ideas, debates, events, and rigorous academic research.

With regard to research, IREF supports original research projects that lead to the production of papers of academic quality of at least 7,000 words. This support is not a prize to published work, nor is it an encouragement to “work in progress”.The paper must have clear policy implications. It will be circulated as an IREF working paper and the author is expected to publish it in a reputed academic journal.

Even when a policy is successful in achieving its desired ends, we have to consider its unintended and unforeseen consequences, resulting from cumulative market adjustments to policy changes that make it hard to judge the overall outcome of a policy in our complex economy. The Federal Reserve and European Central Bank’s monetary policy responses to the 2008 financial crisis offer two tales of major unintended consequences. This post discusses unintended outcomes of the U.S. Federal Reserve’s crisis policies. In our next post, we address ECB policies.

Allan Meltzer has died at age 89. The number of articles on Meltzer these days indicate the significance of his contributions. Carnegie Mellon University and Bloomberg published good summary articles on Meltzer’s outstanding academic career, ideas and influence in policy. Jerry O’Driscoll‘s personal note on Alt-M emphasizes that Meltzer was also a great manager and communicator (“He can herd cats”). Check it out!

Estonia was the first European country to introduce a flat tax on income in 1994. Many others followed. For example, Hungary successfully introduced a flat tax in 2012. In the U.S., some of the States (e.g. Pennsylvania) have introduced a flat tax on income. As in Germany, however, the federal income tax in the U.S. is still progressive. We believe the case for the flat tax is strong. Presenting an axiomatic justification for the flat tax as a redistribution rule, this post suggests that you need to accept only a few basic properties to favor a flat tax for income redistribution.

A growing number of economists suggest that governments in highly indebted countries should consider liquidating debt via financial repression. In other words, they want governments to intervene in financial markets and push government borrowing costs below the rate of inflation to erode the real value of debt. In a previous post, I argued that financial repression is dangerous and a drag on growth. This post explains why we can be hopeful that, despite a rise in popularity, the debt liquidationists will not succeed in putting their ideas to work. Debt liquidation via financial repression would necessitate far-reaching regulation or drastic measures, both of which seem unlikely in the US.

The annual meeting of the Society for the Development of Austrian Economics will be held during the Southern Economics Association meetings in Tampa, FL at the Tampa Marriott Waterside Hotel and Marina, November 17-19, 2017 (Friday to Sunday; more information can be found here: https://www.southerneconomic.org/conference/).

Members interested in presenting papers, serving as chairs/discussants, or proposing entire panels should submit proposals by Saturday, April 1, 2017. Continue reading →

Government debt levels in many advanced economies, especially in Southern Europe, in the US and in Japan, have reached peacetime records. People are worried and rightly so: C. Reinhart and K. Rogoff have provided evidence that elevated debt-to-GDP ratios may contribute to stagnation or even debt crises. As austerity policies are unpopular with voters and growth remains rather sluggish, Reinhart and Rogoff suggest that governments might have to consider other options to reduce debt-to-GDP ratios. Debt should be liquidated via financial repression. It’s how governments typically dealt with high levels of debt in history, they say. This time is not different.